Selecting a Distribution Partner in China

For many firms entering China it makes more sense establish their presence through distributors already established in China rather than setting up their own sales and marketing organizations. However, while working through a distributor can reduce capital requirements and reduce risks in some areas, choosing an effective distribution partner raises its own set of challenges.

RightSite spoke with Arie Schreier, Vice-President Downstream at PTL Group, a provider of outsourced management solutions for foreign investors in China to get his insight on selecting a distributor that your business can grow with.

RightSite: Many distributors claim to operate nationally, but may actually cover only one region of the country. How can companies ensure that their products are truly distributed nationwide?

Schreier: Every distributor will claim that they cover all of China, or at least that they have partners that cover all of China. This is far from the truth. In fact no distributor can ensure nationwide coverage, just like no distributor can cover the whole Shanghai area.

The reason is very simple: in China sales are done normally through personal relationships and networks. The “guanxi” network that a distributor has can help a lot in the sales process. For example, if a distributor has good contacts in the purchasing department of a hospital, he will be able to sell this hospital anything from bed sheets to MRI machines. But to the hospital across the street where he has no contacts he may not be able to sell even one bed.

The distributor that you will choose will sell as much as he can to his contacts but when his contacts don’t need any more of your products, this distributor is not likely to find new clients for you. Instead he will try to generate more sales of additional product lines through his existing contacts and then start to neglect the sales of your products.

For a company seeking nationwide coverage, it is better to rely on a number of distributors that will cover a larger geographical area as well generating a variety of sales channels.

The biggest challenge (and possibly the biggest obstacle in China) is to manage so many distributors effectively.

RightSite: Overseas Chinese, Western or local company – does it make a difference where your distributor comes from?

Schreier: All three options have advantages and disadvantages:

Western distributors can communicate with a foreign client more easily and will conduct the business in a Western way (greater transparency and clearer management). Working with these firms can be easier for foreign investors, but there may be questions as to how well the distributor is connected in the industry and whether they have the relationships with key accounts that can lead to actual sales.

Overseas Chinese companies may have many of the communication advantages of the Western distributor, however, they may also lack the local contacts necessary to do business in mainland China.

Local distributors may present difficulties with communication and transparency for foreign investors, however local distributors will deliver the quickest results since they typically have the best networks for generating sales.

No matter where your distributors come from, you should not rely on one or two of them exclusively because most firms struggle to establish generate sales beyond their existing contacts.

RightSite : How can an investor evaluate if a distributor has the client relationships necessary to move product?

Schreier: It is very hard to gauge relationships since the distributor will most likely resist introducing you to his clients. Still, you should try to meet as many clients as possible and learn as much as you can.

RightSite: Do companies need to sign exclusive deals with their distributors?

Schreier: NO WAY! If you want to kill your business in China the quickest way to do it is to sign an exclusive agreement with a distributor. The distributor will sell your products for a year a two and keep you happy but from the 3rd year sales will drop. Your distributor will have a long list of excuses blaming everything but himself. At that point there is very little that he is willing to do for you and very little that you can do if you have an exclusive agreement with him.

RightSite: What are the qualities to look for in a distributor to make sure they are qualified?

Schreier: Investors checking out potential distributor should focus on these five points:

Sound Sales Record

You need to ask for documentation of a successful sales record including many different key accounts that are relevant to your business.

Transparency

You need to know everything about the way a distributor would conduct your business in China:

Who are the end users?

What is the price he is selling for your goods?

What are the end users saying about the product? (Except “too expensive”).

What is the cost structure from CIF price to end user price?

What is the commission used in the industry?

There are also many other pieces of information you need to dig out from your distributor, and naturally they has very little interest in sharing any of the above data with you. But this is information that you need before signing any deal.

After-service technical abilities

If your products need technical support, you want to make sure the distributor can provide the technical team to support your products.

Marketing abilities

The distributor should show capabilities to lead marketing campaigns and push your products instead of waiting for you to do take the lead.

If possible, visit all of his partners or associates in other cities around China. Even if a distributor is big in Shanghai he might have only small or insignificant partners in other regions.

Due Diligence

Check all legal documents: business license, Trading license, license to sell your products, bank account details, tax authority documents. Also check with government authorities to ensure the distributor does not appear in any blacklist.

RightSite: Can you name the top five points a company make sure are covered in their contract with distributors?

Schreier: My personal five points would be:

1. No exclusivity

2. Technical support

3. Payment terms

4. Responsibility for marketing efforts

5. Termination terms

RightSite: In terms of logistics capability, how can a company make sure that a distributor has the storage and transport resources necessary to distribute their product effectively?

Schreier: Visit all facilities of the company, then come and make a surprise visit when the owner is not there or send your trustworthy Chinese friend to check on all facilities. Cross check to find out who is the real owner of the company and the owner of the facilities.

You can even ask a recruiting company to bring one of the employees of the distributor for a job interview that you will make up. In the interview you will get all the dirt that you want to know about this company.

RightSite: What about relationships with customs? How important is it to have a distributor that is familiar with China customs regulations and practices?

Schreier: It is important to have someone who knows what they are doing with the customs: it can be the distributor but most distributors use third party import/export company to deal with this issue. They will probably use their friend/brother/uncle so it is not necessarily the best person for the job.

We highly recommend that you choose your own logistics company to handle the import of your products. You can do a proper market search for a good provider who can handle this in a professional way and reduce the duty as much as possible. More importantly, this enables you to hold part of the distribution chain in China.